Kilroy Realty (NYSE:KRC) reported fourth-quarter funds from operations (FFO) of $0.97 per diluted share and highlighted what management described as improved leasing conditions across its West Coast markets, alongside continued portfolio recycling and updates on two major development projects that will affect 2026 results.
Leasing activity strengthens as office demand improves
Chief Executive Officer Angela Aman said 2025 was marked by “meaningful progress and momentum,” citing leasing execution, asset sales, and capital redeployment. Fourth-quarter leasing totaled approximately 827,000 square feet, the company’s strongest fourth-quarter performance in six years, bringing full-year leasing to about 2.1 million square feet.
Management cited several quarter highlights across the portfolio:
- Hollywood: a 93,000-square-foot new lease with Fitler Club at Columbia Square to backfill space vacated by NeueHouse following bankruptcy.
- West Los Angeles: a 79,000-square-foot renewal with Riot Games for the Arena building.
- Beverly Hills: eight new and renewal lease executions at Maple Plaza, which management said improved the lease rate by 230 basis points during the quarter.
- Seattle: 74,000 square feet of new long-term lease executions at West 8th, a recently renovated project in the Denny Regrade submarket.
- San Francisco: continued AI-related leasing and a growing pipeline for spec suite space under construction in SoMa.
Chief Leasing Officer Rob Paratte said premium sublease space in San Francisco is “virtually gone” and highlighted a metric that 47% of the market’s reported availability has not transacted since 2021, which he said reduces competitive impact on Kilroy’s product. He also said two-thirds of large leases completed in San Francisco in 2025 (30,000 square feet or greater) were expansion-focused, and that 2025 saw 16 deals over 100,000 square feet, a level he compared to prior “boom years.”
Kilroy Oyster Point Phase Two leasing advances, but yield revised lower
A key focus was leasing progress at Kilroy Oyster Point Phase Two (KOP2) in South San Francisco. Aman reported 316,000 square feet of lease executions at KOP2 during the quarter, including a 280,000-square-foot full-building lease with UCSF. The company said the project’s lease rate is now 44%.
Management described the UCSF deal as a 16.5-year lease that provides long-term cash flow stability and an institutional-credit anchor. In response to analyst questions, the company said the building is in shell condition and the commencement timing reflects space planning and build-out across multiple user groups, adding that the team is focused on accelerating occupancy commencement timelines.
Kilroy also updated cost and return expectations at KOP2. Aman said refinements to total project costs and leasing assumptions resulted in an anticipated stabilized cash yield in the mid-5% range, about 100 basis points below the original underwriting. She said the revised estimate reflects executed leases and prevailing market leasing economics for remaining vacancy.
Capital recycling and acquisitions reshape the portfolio
Kilroy paired leasing gains with additional asset sales. In December, the company sold Sunset Media Center in Hollywood for $61 million. In January, it closed the sale of Kilroy Sabre Springs in San Diego for $125 million, with management citing weaker long-term fundamentals in the I-15 corridor relative to other San Diego clusters, tenant churn, higher vacancy, and elevated capital needs.
Executive Vice President and Chief Investment Officer Eliott Trencher said the company closed or entered into contracts on roughly $755 million of sales in 2025 and January 2026, including about $465 million of operating property sales across three transactions in 2025, the $125 million sale that closed in January, and $165 million of land sales under contract across three transactions. For the operating properties sold, Trencher said occupancy was 79%, rents were about 15% above market, weighted average remaining lease term was 2.5 years, and the CapEx-to-NOI ratio exceeded 30%.
On land dispositions, the company entered into an agreement to sell the remaining portion of the Santa Fe Summit land parcel for $86 million. Trencher said the 17-acre portion requires a zoning change for residential use and is estimated to be complete in 2028; a separate five-acre portion remains expected to close in 2026 for $38 million.
On the acquisition side, management highlighted the $192 million purchase of Nautilus, a four-building multi-tenant life science campus in Torrey Pines. Trencher said the acquisition price equated to about $825 per square foot, below estimated replacement costs of $1,400 to $1,500 per square foot. Nautilus historically averaged 94% occupancy over the last decade, but was 75% occupied at closing following a late-2025 move-out. Management said it plans to add spec suites to drive lease-up and expects stabilized yields in the upper single digits and unlevered IRRs in the low double digits, with about 50,000 to 55,000 square feet remaining to lease as the primary driver to stabilization.
Financial results and 2026 guidance highlight KOP2 and Flower Mart impacts
Chief Financial Officer Jeffrey Kuehling reported year-end occupancy of 81.6%, up 60 basis points sequentially, aided by accelerated rent commencements and a roughly 30-basis-point benefit from capital recycling. Cash same-property NOI growth was negative 7.2% in the quarter, primarily due to a large restoration fee recognized in the fourth quarter of 2024, which he said reduced current-year growth by 350 basis points.
Kuehling said fourth-quarter leasing spreads were pressured by two Los Angeles transactions: the Riot Games renewal and the re-leasing of the former NeueHouse space. Excluding those deals, he said GAAP rents on signed leases would have increased 16.2% and cash rents would have decreased 2.6% from prior levels.
For 2026, Kilroy guided to FFO of $3.25 to $3.45 per diluted share, with a midpoint of $3.35. Average occupancy is expected to be 76% to 78%, which management said is largely driven by KOP2 entering the stabilized portfolio in January 2026. Excluding KOP2, 2026 average occupancy is expected to be 80% to 81.5%, roughly in line with 2025 at the midpoint. Management also said 2026 lease expirations are front-half weighted, with occupancy expected to trough in the second quarter.
Cash same-property NOI growth (excluding KOP2) is projected to range from flat to negative 1.5%. Kuehling said base rent is expected to add about 50 basis points at the midpoint, while net recoveries are expected to detract about 125 basis points, citing prior-year tax appeal benefits and refunds as a headwind.
Development-related impacts were also emphasized. Kuehling said KOP2 expense capitalization ends at the end of January 2026, after which approximately $5 million per quarter of operating expenses and taxes and about $10 million per quarter of capitalized interest will begin flowing through earnings starting in February. For Flower Mart, the company continues to assume capitalization will cease at the end of June 2026, at which point approximately $1 million of quarterly operating expenses and taxes and $7 million of quarterly capitalized interest will impact earnings. Kilroy’s guidance for NOI from development properties was negative $23.5 million to negative $25 million, which management said is largely driven by KOP2 and Flower Mart.
On capital allocation, Kilroy said it expects about $325 million of operating dispositions in 2026, including Kilroy Sabre Springs. Management said it will evaluate a range of uses for proceeds—including acquisitions, share repurchases, and debt reduction—while prioritizing balance sheet flexibility. Kuehling noted that two of the company’s late-2026 maturities are private placement notes, providing flexibility on timing.
About Kilroy Realty (NYSE:KRC)
Kilroy Realty Corporation (NYSE: KRC) is a publicly traded real estate investment trust focused on the development, acquisition and management of high‐quality office and mixed‐use properties along the U.S. West Coast. The company’s portfolio encompasses major urban markets including Los Angeles, San Diego, the San Francisco Bay Area and Seattle. Kilroy Realty targets properties in transit‐oriented submarkets, blending workplace space with retail, residential and hospitality amenities to create vibrant, walkable neighborhoods.
Founded in the mid‐20th century by members of the Kilroy family, the company evolved from a regional landlord into one of the leading West Coast office landlords.
